ICBA Policy Resolution: Housing Finance Reform and Regulation of GSEs

Position

  • ICBA supports both administrative and legislative housing finance reform to preserve market liquidity, protect taxpayers, encourage the return of private capital to housing finance, and ensure a stable national mortgage market for all stakeholders.
  • The Federal Housing Finance Administration (FHFA) in coordination with the Treasury must take steps to end the destructive sweep of GSE earnings to Treasury that prevents the GSEs from retaining their earnings and rebuilding their capital.
  • FHFA and Treasury should work together to develop a path forward to end the conservatorships.
  • Housing finance reform efforts must provide robust and equitable secondary market access for lenders of all sizes, ensure no competition from the GSEs or their successors at the retail level, and permit retention of mortgage servicing rights on transferred loans. The GSE secondary market structure must not be turned over to the largest national lenders and Wall Street institutions.
  • Community banks must be able to sell loans on a single loan basis for cash, effectively hedge interest rates, and offer rate-locks at low cost.
  • Secondary market sales must be relatively simple. A process that requires complex credit enhancements, for example, will disadvantage community banks and other small lenders that lack the scale or resources to obtain and manage such enhancements from multiple parties.
  • Any successor to the GSEs must have a specific duty to serve all markets, including small towns and rural areas. Appraisal and underwriting guidelines must be flexible enough to accommodate the unique characteristics of these markets.
  • ICBA is committed to preserving the 30-year fixed-rate mortgage for creditworthy customers in all markets.
  • ICBA supports a government guaranty on GSE-issued mortgage-backed securities (MBS) as catastrophic loss protection that is fully and explicitly priced into the guarantee fee and the loan-level price.
  • Single-director governance of the FHFA should be replaced with a five-member commission to bring a diversity of views and create a system of checks and balances that would strengthen rulemaking.
 

Background

Community banks represent approximately 20 percent of the mortgage market, and secondary market sales are a significant line of business for many community banks. According to an ICBA survey, nearly 70 percent of community bank respondents sell half or more of the mortgages they originate into the secondary market. While many community banks choose to hold most of their mortgage loans in portfolio, robust secondary market access remains critical for them to support mortgage lending demand. This is particularly true for fixed-rate lending. For a community bank, it is prohibitively expensive to hedge the interest rate risk that comes with fixed-rate lending. Secondary market sales eliminate this risk.

There is bipartisan consensus that the government’s dominant role in the housing market should be reduced to its more traditional role (less than 50 percent of secondary market sales). ICBA welcomes the return to a more balanced and less concentrated housing finance system with an appropriate role for portfolio lenders, originate-and-sell lenders, and small as well as large lenders. If implemented thoughtfully, such a system would reduce the moral hazard and taxpayer liability of the current system.

There is also consensus that the ten-year-old conservatorship of the GSEs should end, and the GSEs should begin to rebuild their capital. As legislative reform is unlikely to occur, the FHFA and the Treasury should act under the existing authorities provided in the Housing and Economic Recovery Act and the Preferred Stock Purchase Agreements. Those authorities include ending the net worth sweep of GSE earnings to Treasury and the development and implementation of plans to recapitalize the GSEs. Failure to end the net worth sweep will lead to another taxpayer bailout, and possibly cause disruption in the housing market.

The current GSE secondary mortgage market structure has worked well for community banks by providing equitable access, not competing at the retail level, and permitting community banks to retain mortgage servicing rights on the loans they sell.

The goal in reforming the housing finance system must be to address the problems of the old system and restore balance among portfolio lenders, small financial institutions, and large lenders. Policymakers must be careful not to create a system that eradicates liquidity for all but the largest players, limits access to the market or narrows options for smaller lenders and imposes requirements that make it too costly for smaller lenders and servicers to participate.

Staff Contact: Ron Haynie and Amy Roberti